Ozzy and Bieber Can't Save Best Buy

Best Buy (NYSE: BBY  ) sure knows how to break in a ridiculous product with a bang.

The consumer electronics giant let the world know about its buyback protection program during the Super Bowl weekend in one of the game's more memorable ads, starring Ozzy Osbourne and Justin Bieber.

Osbourne grows flustered as 4G smartphones become 5G devices in a commercial shoot, so in steps Bieber to pitch 6G handsets.

"Technology moves fast," goes the pitch. "Don't get left behind."

It's a clever ad, but this is still an upsell initiative that is going to confuse Best Buy shoppers. I thought its buyback program was a ridiculous idea a month ago, joking that Best Buy shareholders are the ones in need of protection from obsolescence after a disappointing holiday quarter. I haven't changed my mind.

Let's go over how this goes.

Between now and Saturday, Best Buy is offering the protection for free. It's a no-brainer. Go for it.

Be careful next week, though.

The ugly math of keeping up with technology
At the time of buying a new laptop, tablet, TV, or mobile phone, Best Buy shoppers will have the option of paying between $40 and $350 more for this obsolescence insurance.

Let's say you buy an entry-level iPad for $500. You missed the memo, unaware that the cooler iPad 2 is coming out in two months. You want out. Thankfully, since you paid $570 instead of $500 at the time of purchase, you can just return it to your local Best Buy for $250 in gift certificates during the first six months.

You have to act quickly. That $250 turns into $200 after six months. If you wait a year, Best Buy will only give you $150 as long as it's in decent condition. The payout shrinks to $100 during the final six months of the two-year plan.

This sounds like a bad deal. Surely you can do better through Craigslist or even eBay (Nasdaq: EBAY  ) . However, it's an even bigger loser than you may think. You're not getting $250 back for returning a $500 iPad in a couple of months. You paid an extra $69.99 plus tax upfront, so you're really selling it for the equivalent of $180. By August, that $200 rate is more like $130.

Really? You don't think you can earn more than that through third parties (i.e., eBay) with minimal effort? Oh, and remember that you're getting paid in Best Buy currency. This may work out perfectly if you're thinking of trading up on the spot, but if not, it'll be just another unused gift card collecting dust in your billfold.

Every retailer is a swap shop
Don't confuse this ridiculous insurance with the practice of trade-ins, which Best Buy already does for some items.

RadioShack (NYSE: RSH  ) accepts trade-ins. Wal-Mart's (NYSE: WMT  ) website offers a trade-in program through Gazelle for Wal-Mart gift cards.

Trade-ins can even be an effective model. GameStop's (NYSE: GME  ) thickest margins come from its used-game sales. How does GameStop stock up on used wares? It offers gamers the ability to trade in older games and systems for money that they turn right around to use on new releases.

GameStop's been doing so well with its trade-in business that it attracted Best Buy, Toys "R" Us, and Amazon.com (Nasdaq: AMZN  ) to take a page out of the specialty retailer's playbook and offer video game trade-ins. Yes, even a web-based merchant like Amazon can cash in on secondhand goods.

The buyback program isn't like that at all. It stems from a conscious upcharge decision at the time of original sale. It is a closer fit to the chain's Geek Squad Black Tie Protection, where buyers pay for a set number of years of support and maintenance.

As someone whose first job was a telemarketing gig selling maintenance agreements for Sears in high school, I won't badmouth Best Buy's Black Tie Protection. There are obviously cases where the protection winds up more than paying for itself. However, outside of some select smartphone deals that can potentially be exploited by nimble opportunists, this is the kind of deal where there are better alternatives for nearly every example. Even a charitable donation may make more sense toward the end of these terms!

I won't be right about every transaction. Someone may eventually post a comment about how this service saved them a sweet chunk of change. It will likely be an isolated example. Best Buy isn't offering this unless it believes that it will make more money than it has to dish out.

It's going to be bad news all around for Best Buy. It won't be a popular offering. It will confuse some shoppers and cheapen Best Buy's image to others who may somehow believe that Best Buy is actually reselling these trade-ins as new. It's not, obviously, but it's the pawnshop scent that the retailer will start to emit.

Between pitches for the buyback program and Black Tie Protection, the in-store climate will get as pushy as Circuit City was before it was forced to liquidate. Best Buy has already been losing sales to Amazon.com. Now ex-Best Buy shoppers will have another reason to turn to the Internet for their consumer electronics needs.

I liked the ad. I think Osbourne and Bieber were good self-effacing sports. I just don't like the product for consumers or shareholders.

Will the buyback program work at Best Buy? Share your thoughts in the comment box below.

Best Buy and Wal-Mart are Motley Fool Inside Value picks. Amazon.com, Best Buy, and eBay are Motley Fool Stock Advisor recommendations. Wal-Mart is a Motley Fool Global Gains choice. Motley Fool Options has recommended writing covered calls on GameStop. The Fool owns shares of Best Buy, GameStop, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz came out of 2009's liquidation sale at Circuit City empty-handed. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2011, at 10:14 AM, misty1781 wrote:

    Most of your article makes sense. However....

    This has been said about Geek Squad as well, and can be said for similar services at any store. I can make more selling a video game on eBay than I can at GameStop. One requires more time and effort. Some people don't want to do that.

    I personally wouldn't buy used electronics from Craigslist or eBay. Never have and never will, therefore I (personally) wouldn't sell my electronics on eBay beyond video games. I'm the kind of person where I want my warranty and protection in case something goes wrong. You pay a little more up front for piece of mind - that's what insurance is.

    The buy back program is different than a trade in. The amount you get back from the trade in services is very minimal. The good thing about the service is that YOU KNOW UP FRONT what you're going to get back and what your time frame is. It's up to the consumers to do their research if what they're buying is a good deal. You have 14 days, or the return policy time, on all items to decide if you want the buy back program. So do your research and go back. It gets really old all the bashing on stores for making money - that's what they're around to do - when in many cases it actually benefits the consumer, and many people don't want to spend the time on the Internet, meeting up with strangers on Craigslist or dealing with eBay and fees and shipping.

  • Report this Comment On February 09, 2011, at 2:56 PM, giantgizmo wrote:

    all I know is it does make sense. I tried to sell a computer that I bought 18 months prior last summer for $200 along that I originally bought with a 3 year service plan from best buy. The computer cost me $850. Nobody would buy it from me, they said it was too much. If I would have got the buy back with the prorated price for the service agreement I would have gotten back more than $200. And it's not that bad because when I just bought a new laptop since I got the service agreement with it the buy back dropped to $35 instead of $70. Not too shabby, especially since I like to get new technology of laptops when they come out.

  • Report this Comment On February 10, 2011, at 8:10 AM, Mspikes wrote:

    I think like the author of the article, and believe that this whole buy back thing is a bunch of bunk. We should all know that electronic items will depreciate in cost but, with a little foresight, and a little ingenuity, a person can utilize Craigslist and Ebay to their advantage. Every time I consider making a large electronics purchase, I might walk into a Best Buy or another big-box store, but it's only to see the actual item that I'm trying to buy, or to search for a closeout or clearance on one of these items. Once I aggregate a few prices, then I jump over to Craigslist and Ebay to compare. Sure, it takes a lot more work, but as a tech junkie, I have to find ways to satisfy my itch to buy with the amount of money I actually have to spend.

    Here's a quick example.... in the past 6 months, I've bought a 13" Macbook, a 15" HP Laptop, a 42" LCD TV, and 2 50" plasma TVs (christmas gift) all for under $2,000. How? Craigslist, Ebay, and Open-Box clearance buying..

    What I've experienced however is when it comes to big ticket electronics like big screen LCD/LED/Plasma TV's and computers, most people just want them to work, and aren't very concerned with the innards, features, and upkeep of these items. They just want to hit the power button, and see a picture on the screen...and that's fine, I guess... but it just leads to a lot more headaches, and a lot more money out of pocket. I've tried to teach others about the virtues of buying used electronics but they don't see the benefits, because they aren't willing to take the time to learn how to actually use them, and keep them up.

    So, I see the Best Buy protection probably doing alright... but, I won't be purchasing it.

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